In 1995 Buzz Lightyear, a na’ve toy unaware of his surroundings, stepped onto the screen of the animated Disney Pixar movie “Toy Story” and made a bold prediction. He described the fiscal spending habits of the U.S. Government nearly a decade into the future: to infinity and beyond.
Also in 1995, the United States was experiencing possibly the biggest economic boom of the 20th century while under the deficit cutting guidance of president Bill Clinton. This is partially what makes Buzz’s prediction so bold.
Kids loved Lightyear for his comedic relief and heroic chiseled jaw. It seems President Bush saw the beloved children’s movie as well and that the government budget deficit came as close to infinity and beyond as possible. After eight years of presidency, Bush is handing off a projected trillion-dollar budget deficit for 2009 to President-Elect Barack Obama.
A nice house warming gift, right?
The spiraling out of control deficit began in 2001. With Bush’s tax cuts the government began the process of spending more money than it was bringing in. Then, in 2003, the U.S. entered the war in Iraq and many billions later the annual budget deficit was hovering in the $300-400 billion range. And now, recently with bailout mania coming to an industry near you and a likely stimulus package in the neighborhood of $300-500 billion, the deficit has reached its highest annual levels in history.
The federal deficit first reached $1 trillion back in 1981 under Ronald Regan. This represented the total federal deficit including all borrowed funds dating back to when the United States started borrowing for the revolutionary war. When he learned of the budget ballooning to over $1 trillion, Regan admitted to not being able to fully comprehend a trillion dollars. To quantify it he said, “the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.”
The total budget deficit was $1 trillion in 1981, now the deficit is $1 trillion per year just to pay the bills.
Why should we worry about the deficit?
In 1981 when Regan took office the budget was 2.6 percent of GDP, barely more than the average annual growth rate of GDP of 2.5 percent. After a round of tax cuts, defense spending, and a recession, the deficit increased to 6 percent of GDP. The problem is that the government has to compete with businesses and consumers to borrow money, which naturally pushes up long-term interest rates, slowing long term growth. This was seen as a large deficit compounded over a decade and high interest rates helped to plunge the economy into another recession in 1990.
As of now, depending on how much the economy retracts during the current recession, projections are that the debt could rise to as much as 7 percent of GDP. An all time high.
Granted, the ballooning deficit of 2009 includes many one-time expenditures such as the nationalizing of the financial industry and loans to the Detroit automakers that the government will eventually recover. But a long-term growing budget deficit could also lead to inflation in the long run if the fed has to monetize the debt to pay the bills.
In the movie, Lightyear eventually learned that he could not fly high and infinity and beyond was unreachable. Congress and the white house will have to learn the same lesson and bring the deficit down to more worldly levels. They cannot ignore the growing issue forever and continue to hope that the country will simply grow out of the deficit.
